Swiss Franc Shock of 2015 Came as No Surprise for Some, BIS Paper Finds

By Brian Blackstone Features Dow Jones Newswires

Doubts in financial markets had already crept in about the Swiss National Bank's commitment to the franc ceiling even before the SNB unexpectedly jettisoned the policy in January 2015, according to a paper published Wednesday by the Bank for International Settlements.

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The paper sheds light on one of the biggest events to roil currency markets in many years. On Jan. 15, 2015, the SNB abandoned its commitment to cap the value of the franc without warning, sending the Swiss currency soaring against the euro and other currencies.

Less than a month earlier, SNB Chairman Thomas Jordan had called the cap "the key instrument" for the central bank and that the SNB would enforce it "with the utmost determination."

Under the policy, the SNB said it wouldn't allow the euro to weaken below 1.20 francs and would intervene if necessary. For this reason, the policy was often referred to as a floor on the euro's value against the franc.

"In this paper, we found that financial markets attached some credibility to the Swiss franc floor, since the break probabilities never significantly exceeded 50% while the floor was in place, but especially at longer maturities there was some doubt," the authors wrote.

"We also found that the credibility of the Swiss franc floor decreased to some degree as the spot exchange rate approached the lower bound of 1.20 Swiss franc per euro," they wrote.

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The franc's value was closely tied to the ebb and flow of Europe's debt crisis, which started in 2010 in Greece and later fanned out to grip Ireland, Portugal, Spain and Italy. When doubts about the euro's survival escalated in financial markets the franc typically saw upward pressure given its global status as a safe-haven currency. It also faced pressure ahead of the European Central Bank's quantitative easing program which was announced in early 2015.

"During the turbulent times in 2012 and at the end of 2014, the densities for all maturities tell basically the same story. Markets assessed the likelihood of discontinuing the Swiss franc floor within the option expiration to be about 50%, that is, there was some doubt about the SNB's commitment to the currency floor during those turbulent times," the authors wrote.

The euro remains considerably below the 1.20 level 2 1/2 years after the floor was dropped, and the SNB has spent vast sums intervening to keep the franc from strengthening too much. However, the euro has risen against the franc in recent months amid a brighter outlook for the European economy.

On Monday, the euro broke above 1.10 francs to a one-year high, and it fetched 1.1041 early Wednesday. The SNB's foreign reserves have also stabilized, suggesting it has pulled back from its currency-intervention efforts.

Write to Brian Blackstone at brian.blackstone@wsj.com

(END) Dow Jones Newswires

July 12, 2017 06:30 ET (10:30 GMT)